The Danger Zone

Written by Jeff Thredgold, President, Thredgold Economic Associates

January 24, 2012

The world’s economy is “deeply into the danger zone”
because of risks from the eurozone, the International Monetary Fund has stated.
The IMF predicts the global economy will grow by 3.25% (after inflation) in 2012, down from
an earlier forecast of 4.0%. Global output is forecast to expand 3.9% in 2013, down from
a previous forecast of 4.5%.

The Washington DC-based IMF suggests that the eurozone is set for a “mild recession”
in 2012, with a 0.5% reduction in real GDP expected, compared to a previous forecast of 1.1% growth.
Our own forecast would have a deeper European recession.

A British Treasury official noted that “The IMF has downgraded its growth forecasts for all the
major economies, reflecting the deterioration in the global outlook since their last forecasts in
September,” as noted by the BBC.

German growth estimates have been reduced to 0.3% in 2012, down from the originally predicted 1.3%
growth pace last September. Interestingly, the IMF stands by its 1.8% growth prediction for the
U.S., based somewhat on recent strong domestic data on jobs and manufacturing, notes the BBC.

The IMF noted that Europe’s most pressing challenge was to restore confidence and put an end to
the crisis in the euro area. The IMF warned that the “United States and other advanced economies
are susceptible to spillovers from a potential intensification of the eurozone crisis.”

The IMF warned that overly aggressive austerity measures could backfire. “Going too fast
(to cut deficits) will kill growth and derail the recovery,” noted an IMF economist. What’s
needed is a credible, medium-term plan to reduce deficits over time, he said, adding that the United States
and Japan have both so far failed to provide such plans (www.marketwatch.com).

Japan is forecast to rebound from a 0.9% contraction in 2011 to grow 1.7% in 2012, down from a September
forecast of 2.3%. China is now expected to see growth slow from 9.2% in 2011 to 8.2% in 2012, and then
pick up speed to 8.8% in 2013. Overall emerging markets and developing nations are forecast to see 2012
growth of 5.4%, down from a September estimate of 6.1%. Growth in 2013 is forecast at 5.9%.